Sunak Delivers Johnson-Style Budget That Ramps Up U.K. Spending


David Fuller and Eoin Treacy’s

Comment of the Day

October – 272021

Commentary by Eoin Treacy

Eoin Treacy’s view

Some of the topics discussed include: UK budget successfully talks yields lower, gold steady, oil weak, growth stocks rebound, China weak, Australian Dollar, Canadian Dollar firm, Taiwan, Vietnam and Singapore steady.

Sunak Delivers Johnson-Style Budget That Ramps Up U.K. Spending

This article from Bloomberg may be of interest to subscribers. Here is a section:

“We need to strengthen our public finances so that when the next crisis comes, we have the fiscal space to act,” Sunak said. He also said the country hasn’t yet turned the corner on infections, warning of “challenging months ahead.”

The chancellor signaled the need to repair the country’s finances after racking up hundreds of billions of extra debt to protect workers and businesses through the pandemic. Unveiling new fiscal rules that will guide his approach to rebuilding the economy from its worst recession in a century, he vowed that in “normal times,” the government would only borrow to invest and that underlying public sector net debt must be falling as a percentage of output.

With inflation already well above the Bank of England‘s 2% target and forecast to rise to at least double that, it’s already raising the cost of repaying the country’s debt, a quarter of which is linked to inflation indexes. Sunak also faces the prospect of an interest-rate hike that would add to borrowing costs: For every percentage point that interest rates go up, the Treasury estimates it would cost an extra 23 billion pounds a year.

“The House will recognize the challenging backdrop of rising inflation,” the chancellor said. “Our public finances are twice as sensitive to changes in interest rates as they were before the pandemic and six times as sensitive as they were before the financial crisis.”


Sunak’s firepower was boosted by a significantly improved outlook for the British economy from the Office for Budget Responsibility, the government’s independent fiscal watchdog. It revised upwards its forecast for growth this year to 6.5% from 4%, and downwards its forecast for the long-term economic scarring caused by the pandemic to 2% of output from 3%.

With growth filling the government coffers, the OBR’s borrowing forecast for the next five years was lowered by 154 billion pounds, while planned debt sales for this fiscal year were cut by a fifth.

Eoin Treacy’s view

The UK is boosting spending which is a crowd pleaser. That’s possible because the economy is rebounding from the pandemic nadir and the outsized growth is benefitting from the base effect of last year’s decline. Sustaining that momentum will be a key challenge, so supporting workers with higher wages and businesses with lower taxes is a necessary move but it also delays balancing the budget which will exacerbate the fiscal drag.

The challenge for every country is in gauging how persistent inflationary pressures are. The UK government’s frank discussion on how sensitive government finances are to interest rates is a welcome development. That helped Gilts rebound today and took the 10-year yield back below the psychological 1%.

The UK’s government is one of the few speaking openly about the impact of rising rates on fiscal policy. However, the reality is they have chosen not to address it in an overly aggressive manner. That’s the logical course of action since the early portion of an inflationary cycle as associated with a boom.

The Pound continues to hold its mild downtrend against the US Dollar and is also pausing against the Euro. That’s a clear indication the UK has no interest in having the world’s strongest currency.

The benefits provided the hospitality sector in this year’s budget lend support to Whitbread, J D Wetherspoon (upside weekly key reversal), Mitchells & Butlers (LSE:MAB) and Marston’s.

Bitcoin Breaks Below $60,000 as ETF-Related Bliss Evaporates

This article for Bloomberg may be of interest to subscribers. Here is a section:

Analysts said speculators are cutting back on positions as the launch of the first U.S. Bitcoin exchange-traded fund fanned enthusiasm and pushed prices to new all-time highs. Total liquidations of long crypto positions topped $700 million on Wednesday, the most since Sept. 20, according to data from

“The market has been leveraged long for a few weeks, so there has been that overhang in positioning,” said Jonathan Cheesman, head of over-the-counter and institutional sales at crypto-derivatives exchange FTX.

Stephane Ouellette, chief executive and co-founder of FRNT Financial Inc., a crypto-focused capital-markets platform, said some of the elation around the ETFs has vanished and the selloff’s been exacerbated by the fact that there is much more leverage available in crypto for retail traders globally than there is in other asset classes.

“We already saw a wave of quite severe leverage come into the space which was evidenced by futures contangos, perpetual swap and peer-to-peer lending rates all spiking around the launch of the BTC ETF,” Ouellette said. “In the last few weeks, for example, we saw monthly and quarterly BTC futures contangos in the 20-to-30% range. While leverage can in some cases get even more extreme, the activity over the last few days has some tell-tale signs of a typical crypto check-back.”

Eoin Treacy’s view

Futures-based funds were originally designed for intraday trading but investors assume they were designed for holding for longer time periods. The embedded loss from rolling contracts in contango ensures futures’ funds fall more during setbacks and rally less during rallies. That guarantees they will underperform their benchmark over the medium term.

The first bitcoin ETF quickly bumped up against the position limits set by the CME. That’s a limiting factor on its growth and suggests the number of funds will need to continue to proliferate in order to continue to increase the overall investor position via futures’-based ETFs.

The other side of that argument is that since the current ETFs are guaranteed to underperform, they represent high-beta plays for short sellers via put options. That selling pressure combined with greater liquidity has the capacity to increase scope for occasional bouts of higher volatility.

$10,000 to $12,000 pullbacks have occurred twice since the May lows. That suggests a sustained move below $50,000 will be required to question the consistency of the short-term advance.

U.S. 5-Year Auction Short Stop Is Among Biggest of Past Decade

This article from Bloomberg may be of interest to subscribers. Here is a section:

Wednesday’s $61b Treasury 5-year auction was among the strongest on record gauging by its yield relative to where it was trading at the bidding deadline. The auction yield of 1.157% was 2.5bp lower than the approximate pre-auction level of 1.182%, a sign that dealers underestimated investor demand for the notes. Consistent with that, the share awarded to primary dealers was among the lowest on record.

While the difference between an auction yield and the pre-auction level is always an estimate, as dealers may quote the issue differently, the last time a 5-year note auction stopped short by more than that was in November 2009; a $42 billion auction that month was awarded at 2.175%, 3.6bp below where it had been quoted moments before

Wednesday’s 17.9% primary dealer award was the third lowest on record in data since 2004, reflecting above-average shares for indirect and direct bidders

Eoin Treacy’s view

Longer-dated bonds rallied in a number of countries today. That suggests investors are still willing to give the benefit of the doubt to the view that inflationary pressures are going to moderate or at the very least that yields have run away from the publicly stated intentions of central banks.

The 5-year yield is now unwinding its short-term overextension and a retest of the 1% level looks more likely than not.

The yield curve spread’s swift contraction today is particularly notable since the short end of the curve was static while longer-dated yields contracted. Generally speaking, the times when the curve rallied through 150 basis points on the way to 250-300 coincide with the worst selling pressure in bear markets. If the spread has already peaked for this cycle it points to a shorter expansion but also holds out potential for a significant bubble to form before it next becomes inverted.

Every time bond yields contract, it helps to support the bullish argument for technology shares. Outsized earnings from Microsoft and Alphabet also helped to support the market today.

Eoin’s personal portfolio: leveraged profits taken September 7th

Eoin Treacy’s view

One of the most commonly asked questions by subscribers is how to find details of my open traders. To make it easier I will simply repost the latest summary daily until there is a change.

I bought back into both bitcoin and ethereum last on August 6th. I took the profit in both positions today at $47,935 and $3,477 against my purchases at $42,427 and $2,866 respectively. I’ve been happy to buy back on weakness but remain of the view that the risk in the sector is substantially higher since the peak in March. Therefore, my policy was to sell on the first sign of trouble. That was delivered today with large downward dynamics.

I increased my platinum long on August 27th paying $1002 for another position. My existing platinum longs were purchased at $1072 and $885. I remain of the view that precious metals are still cheap and are to be bought on significant dips.

I also continue to hold my silver trading position, initiated at $23.7. I will buy more if the current reaction deepens.

I have been saying for months that I have purchase orders below the market in gold and silver. The first of these was triggered on August 9th. I was filled at $1702.3 including spread-bet dealing costs. My original positions were opened in Q4 2020 at $1879.2 and $1818.6. That reduces by average purchase price to $1800.

I still have additional bids in the market below prevailing prices in gold and silver and will leave them in place to take advantage of any possible additional volatility. These are leveraged trading positions rather than medium to long-term investments.

With baby steps trading one has to have high conviction prices will recover and the patience to buy on weakness before eventually being proved right; hopefully.

Among my investments, my original position in the VanEck Vectors Gold Miners ETF was purchased on March 25th at $20.12. I bought another unit at $35.79 on December 1st. I continue to shop for opportunities in the gold sector.

My two investment positions in Rolls Royce were purchased at 154.75 and 105p respectively. I also took up the rights issue which has resulted in an average purchase price of 54.63p. Rolls Royce has not participated in the stock market rebound of late and continues to form a first step above the Type-2 base formation.

The Chart Seminar 2022

Eoin Treacy’s view

With global vaccination rates rising, the prospect of anti-COVID pills on the horizon and the promise of travel restrictions being dropped, it is time to start thinking about venues for The Chart Seminar in 2022. Please drop [email protected] a line if you would be interested in attending an event next year, as well as your preferred location.


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